Belarus Currency Crisis: Multinational Companies' Fate

Belarus's economy has been described as a very Soviet-style economy, with a highly centralised system that emphasises full employment and a dominant public sector. In 2011, the country faced a currency crisis, with the National Bank of Belarus eventually taking decisive action to establish a single exchange rate for the Belarusian ruble. This was achieved by introducing a single trading session on the Belarusian Currency and Stock Exchange, where buying and selling rates of foreign currencies were determined based on supply and demand.

The country's economy has been affected by political turmoil, with the biggest political protests in decades taking place in 2020, and the ongoing war in Ukraine. In 2022, Belarus was expelled or suspended from international development organisations and severed ties with most of its biggest trading partners, resulting in a recession and a 4.7% drop in GDP. The country has also been subjected to numerous rounds of sanctions by the US, EU, and others, inhibiting its ability to deal in hard currency and causing a technical default on external debts.

The impact of these events on multinational companies in Belarus is not yet clear, but the country's economic stability is closely linked to Russia, which has provided support in the form of preferential conditions for exports and access to transport and port infrastructure. However, with increasing isolation from the EU and US, it remains to be seen how the country's economy, and by extension, its multinational companies, will fare in the long term.

The impact of the 2011 currency crisis on the Belarusian economy

The 2011 currency crisis in Belarus had a significant impact on the country's economy, causing a sharp decline in its financial stability and growth. Here is an overview of the key effects:

Devaluation and Inflation: The Belarusian ruble experienced a significant devaluation, with the exchange rate against the US dollar increasing from 3,000 to 8,500 rubles per dollar, resulting in a cumulative devaluation of 189% in ten months. This led to high inflation, which reached 108.7% in 2011, affecting the purchasing power of the population.

Decrease in Incomes: The average salary in Belarus, when calculated in US dollars, decreased from $530 in December 2010 to $330 in May 2011. This represented a substantial loss in the purchasing power of Belarusian workers, who typically think in dollar terms.

Monetary Policy Challenges: The National Bank of Belarus struggled to manage the situation and implemented a tighter monetary policy to curb inflation. They increased the refinancing rate and raised interest rates to maintain the attractiveness of ruble deposits in banks. However, the population lost confidence in both the Belarusian ruble and the banking system, leading to a withdrawal of deposits and a liquidity crunch in the banking system.

Trade Deficit: The crisis was caused by a negative balance of trade, with a decrease in the rate of return on imports. Belarus experienced a persistent shortage of currency on the foreign exchange market, leading to multiple exchange rates and a black market for currency.

Impact on Businesses: The crisis affected businesses, particularly in the banking sector, which faced liquidity challenges. Additionally, the crisis likely impacted Belarusian companies, making it difficult for them to obtain necessary credit funds due to high-interest rates.

Dependency on Russia: The crisis highlighted Belarus's economic dependence on Russia. In late 2011, Russia provided a bailout, with Russian state-owned and oligarchic companies seeking to take over some of Belarus's largest state-owned enterprises.

The 2011 currency crisis had a profound impact on Belarus's economy, causing devaluation, inflation, decreased incomes, and challenges for the monetary and fiscal policies. The country's recovery was slow due to its isolation from the EU and US, and the impact of the crisis was still felt in subsequent years.

The role of the National Bank of Belarus in the crisis

The National Bank of Belarus played a central role in the currency crisis of 2011. In the second half of 2010, the bank carried out a soft monetary policy to stimulate domestic demand, which resulted in strong economic growth. However, this also led to an increase in real incomes, a negative trade balance, and a reduction in international reserves.

In March 2011, an official and grey currency market emerged in the country, with high domestic demand and rapid devaluation processes leading to an inflationary spiral. The National Bank's response was to implement a tighter monetary policy, increasing the refinancing rate and the rate for its operations to prevent negative tendencies in the domestic currency and deposit market. This, in turn, raised all rates in the deposit and loan market.

The refinancing rate was increased from 10.5% at the beginning of the year to 18% in June 2011, with a simultaneous increase in rates for permanently available operations on liquidity support. The bank also limited the supply on lombard auctions and provided more expensive "overnight" credits.

The growth of the monetary base and money supply was largely due to the growth of cash in circulation. In April 2011, it increased by around 21%, and people started withdrawing deposits, negatively affecting the liquidity of banks. The National Bank continued its refinancing operations in May 2011, and commercial bank requirements increased in both rubles and foreign currency.

During the summer months, the National Bank continued to implement a tight monetary policy, and by the end of August, the refinancing rate had reached 22%.

The crisis led to a slowdown in economic growth, a decrease in the monthly inflation rate, a negative trade balance, and a build-up of foreign reserves. The National Bank's actions contributed to the overall stabilization of the situation on the monetary market.

In September 2011, the National Bank took decisive actions towards establishing a single rate for the Belarusian ruble, introducing a free exchange market session. This resulted in two official rates for the Belarusian ruble: an official rate and a market rate.

By the end of 2011, the Belarusian ruble had been devalued against a basket of currencies by 190% and against the US dollar by 189%. The National Bank continued to implement a tight monetary policy into 2012, limiting the supply of liquidity to commercial banks and maintaining high rates of liquidity operations.

The effect of the crisis on the Belarusian ruble

The Belarusian ruble has had a tumultuous history since the country's independence, with three different versions of the currency being introduced in 1992, 2000, and 2016. The currency has often been subjected to high inflation and devaluation, with multiple economic crises causing instability.

The first Belarusian ruble (BYB) was introduced in 1992 following the collapse of the Soviet Union. It replaced the Soviet ruble at a rate of 1 Belarusian ruble = 10 Soviet rubles and circulated alongside new Russian banknotes until May 1992 when it became the country's official currency.

In 2000, a new ruble (BYR) was introduced, replacing the first at a rate of 1 BYR = 1,000 BYB. This was a redenomination that removed three zeros from the currency.

However, the Belarusian ruble continued to face challenges, and in 2011, the country experienced a currency crisis. Inflation soared, and there was a negative trade balance and a reduction in international reserves. The National Bank of Belarus was forced to spend $1 billion in foreign reserves to balance the supply and demand for currency. Despite these efforts, the ruble was officially devalued by 36% in May 2021, causing a shortage of currency and leading to the creation of a black market.

The situation worsened, and by July 2011, the black market exchange rate reached nearly 6,350 BYR per 1 USD, and in August, it reached 9,000 BYR per 1 USD. The crisis had a significant impact on the economy, with inflation reaching 108.7% in 2011. Average salaries decreased, and refinancing rates rose.

In September 2011, the National Bank of Belarus introduced a free exchange market session to determine the market value of the ruble. However, the currency continued to face pressure, and the exchange rate fluctuated in the following years.

In 2016, a third ruble (BYN) was introduced at a rate of 1 BYN = 10,000 BYR. This was another redenomination that removed four zeros from the currency. Belarus also issued coins for general circulation for the first time.

Since then, the Belarusian ruble has continued to face challenges, including the impact of the COVID-19 pandemic, political unrest, and international sanctions. In 2022, Belarus's facilitation of Russia's invasion of Ukraine led to additional sanctions and further economic difficulties. The country's GDP declined by 4.7% in 2022, and there was a slump in its most profitable exports. The stability of the Belarusian economy remains threatened by these factors, and it is increasingly dependent on Russia's market and subsidies.

The response of the Belarusian government to the crisis

• Tight Monetary Policy: The National Bank of Belarus tightened monetary policy to curb inflation and stabilise the currency. They increased the refinancing rate, raised interest rates on liquidity management operations, and limited the supply of credit to the market. These measures were designed to make ruble deposits more attractive to the population and slow down the devaluation of the currency.
• Unified Exchange Rate: In September 2011, the National Bank established a single exchange rate for the Belarusian ruble by unifying the official and market rates. This move aimed to bring stability to the foreign exchange market and reduce the multiplicity of exchange rates that had formed during the crisis.
• Refinancing Operations: The National Bank continued its refinancing operations to support banks' liquidity, albeit in limited quantities due to the lack of liquidity in the banking system.
• Budget Spending Limitations: The government imposed limitations on budget spending to reduce economic growth and decrease the monthly inflation rate. This was done in parallel with the tight monetary policy.
• Stimulating Foreign Investment: The government sought to attract foreign direct investments and improve export policies to stimulate the economy and increase foreign currency reserves.
• Price Controls: The government introduced price controls to prevent price increases and curb inflation. However, this led to shortages of goods in many shops as businesses struggled to keep up with the regulated prices.
• Support for Businesses: The government injected cash into commercial banks, increasing their liquidity. This was done to compensate for the limited support provided by the National Bank and to stimulate the economy.
• Seeking International Support: Belarus historically relied on bailouts from either Russia or the West during financial crises. In 2011, Russia provided a bailout in exchange for influence over some of Belarus's biggest state-owned companies.
• Seizure of Private Property: The government passed laws allowing for the seizure of private property and violation of intellectual property rights held by citizens of "unfriendly states." This was done in response to the exodus of foreign companies and capital from Belarus.
• Parallel Import Scheme: Belarus engaged in a scheme to evade sanctions by transferring controlled goods imported into the country to Russia without the manufacturer's knowledge or approval.
• Support for Strategic Industries: The government provided preferential credit lines and other benefits to selected segments of the Belarusian industrial sector, such as the machine-building and microelectronic sectors.
• Currency Controls: The government imposed restrictions on the conversion and withdrawal of foreign currency to slow down the depletion of foreign currency reserves.
• Limiting Foreign Investment Exit: Belarus introduced laws limiting the rights of foreign investors from "unfriendly states" to sell their stakes or withdraw from the country. This was done to prevent further capital outflow and protect the economy.

The impact of the crisis on foreign investment in Belarus

The impact of the 2011 currency crisis on foreign investment in Belarus was significant, with the country experiencing a sharp economic downturn and a loss of international reserves. The crisis was caused by a combination of factors, including high domestic demand, rapid devaluation of the Belarusian ruble, and a negative trade balance. This led to a decrease in real incomes and a decline in the country's economic growth.

In response to the crisis, the National Bank of Belarus tightened monetary policy and raised interest rates to curb inflation. However, these measures also contributed to a slowdown in economic growth and a decrease in monthly inflation. The crisis also had a negative impact on the country's banking system, with a lack of liquidity and increased refinancing operations.

The Belarusian government, led by President Lukashenko, played a crucial role in the country's economic recovery. They implemented a series of policies, such as limiting budget spending and attracting foreign direct investments, to stabilize the economy and improve the situation on the foreign exchange market. By 2012, the country had achieved a stable performance in the industrial sector, a slowdown in inflation, and a stable exchange rate.

However, the impact of the 2011 currency crisis on foreign investment in Belarus extended beyond the immediate economic consequences. The country's reputation as an investment destination was damaged, and foreign investors became cautious about investing in Belarus. This was further exacerbated by the country's political instability and the authoritarian rule of President Lukashenko.

To attract foreign investment, the Belarusian government has offered various incentives, such as tax exemptions and preferential treatment, particularly in the priority sectors of pharmaceuticals, biotechnology, and high technology. The government has also established special economic zones and industrial parks to promote foreign investment. Despite these efforts, the country has struggled to fully recover its reputation as an attractive investment destination.

In recent years, Belarus has faced additional challenges, including international sanctions due to its involvement in the Russia-Ukraine conflict and the COVID-19 pandemic. These events have further impacted foreign investment in the country, with many international firms and investors leaving the Belarusian market.

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